Beware of Unintended Gifts to Your Ex

OK. Maybe it’s not your absolute worst nightmare, but it’s probably close.

You die. Your ex inherits some of your property.

What! How can that be? you ask.

Actually, in some states, there may be more than one way.

In Florida and many states though, the way this happens is that a spouse forgets to change their beneficiary designations on their nonprobate assets upon their divorce.

Clients always have a hard time getting this one when I raise this subject with them.

At risk of being simplistic, there are two kinds of property: probate property and nonprobate property.

Probate property is inherited as directed in the owner’s will.

So if you make a will during your marriage and don’t update it upon your divorce, your will still names your ex as your beneficiary. But Florida and many other states have laws that, in effect, write your ex out of your will if your will was made before your divorce was final.

So much for probate property.

But for many people, the majority, if not all of their assets are the other type of property, called nonprobate property. Some examples of nonprobate property include life insurance policies; IRAs, 401Ks and pension plans; a home or other property held in a trust; many bank accounts that are not titled in just one name, and so on.

Nonprobate assets have designated beneficiaries spelled out in their title documents. Wills don’t apply to them at all (unless the named beneficiary is an “estate”).

Suppose a spouse is named as the other spouse’s beneficiary for one of these assets during their marriage. Does the law write the ex out of the beneficiary designation after their divorce?

No, it doesn’t. If the owner-spouse doesn’t change their beneficiary designation after their divorce, their ex remains their beneficiary and inherits from them upon their death.

This was upheld by the US Supreme Court as recently as 2009.

Nightmare come true.

Easily avoided by immediately heeding your divorce lawyer’s advice to update all beneficiary designations and, just to be on the safe side, your will, immediately upon your divorce.

And while your at it, that’s also a good time to consider and address whether your ex is the right person to manage the assets you leave to your children in the unhappy event that you die while your children are still minors. Even if your ex is a wonderful parent, they may not be wonderful at managing those assets … especially if they are significant.

Read more in this Financial Planning article: Heir Loss.